This is a bit of a rehash of a note I wrote back in April but the current conditions seem fitting again as US yields move sharply higher. The turn weaker in the US data from April until August of this year meant that there was renewed demand for bonds as the market began to expect a sharp Fed easing cycle. We have to remember that with the US currently running such large deficits there is constant anxiety about oversupply of US Treasuries that has popped up a couple of times over the last few years. I find it interesting that it has been into 24th October both in 2022 and 2023 that US 30yr yields moved sharply higher and then peaked (this was when fear of inflation/treasury over supply and Fed hawkishness all peaked in both years). These concerns had started to re-emerge in April 2024 but

Views are my own. Not investment advice, just my thoughts on macro developments. There is a lot of discussion as to whether the recent financial instability is at an end or just beginning. As detailed in my previous notes I believe this is just the beginning. Given that markets are now rallying back and discounting any SVB led instability it is worth me detailing my reasoning behind this. The problems at SVB are now well understood. It was really a liquidity issue. As deposits fled they were forced to sell Treasuries held in their “hold to maturity” account and therefore realise the losses on those treasury holdings. Now that the Fed is offering repo of Treasuries at par value in their BTFP scheme this shouldn’t be an immediate problem for other banks. Meanwhile any other funding issu

Views are my own. Just my thoughts on macro developments. Not investment advice. Policy makers have an extremely difficult balancing act to perform. The two sides of their mandate, Price Stability and Financial Stability, each call for different actions. They cannot abandon either so instead they must walk the tightrope between the two. Showing the market they are just as serious about both otherwise they risk falling along with their respective economies. So far ECB’s Lagarde has set the standard on how this should be done. Hiking 50bps and committing to continuing to fight inflation whilst pointing to other tools to support Financial Stability. Lagarde: “I have made clear that there is no trade-off between price stability and financial stability,”. “We have plenty of tools to provide liq

Views are my own. Broad macro thoughts. Not investment advice. Sadly I feel that the credit issues for the market are just getting started. Higher interest rates expose weak balance sheets. They are not the cause of weak balance sheets. Balance sheets that were built on air like FTX or built without interest rate hedges like SVB. These balance sheets were already built on weak foundations. Higher rates just exposed that. They were shown to be swimming naked. What concerns me is that if this many people are being shown to be this naked. Then how many more naked swimmers are out there? The whole thing is starting to look like a nudist beach. The market is starting to have the same concerns and this is where the next problem is. Uncertainty. Uncertainty leads to fear and that leads to a

Views are my own. Not investment advice. Just my thoughts on Macro developments. Overnight we have jumped sharply from risk off driven by a hawkish Fed and higher US yields to panic about the solvency of US banks sparked by Silicon Valley Bank. See here https://www.ft.com/content/47e3d4a7-70b6-4a4e-98b0-6322f8e8ba53 To quickly summarise Silicon Valley Bank has been facing problems meeting demand for customer withdrawals. Being a relatively new bank and focused heavily on the Silicon Valley Tech sector it’s entire client base have been having synchronised issues with the sharp collapse in tech stocks last year. As a result withdrawals have been increasing as these tech companies need the cash and the sudden outflow of deposits is causing a liquidity issue for the bank. To meet this kind of

Views are my own. Not investment advice. Just my thoughts on Macro developments. Powell: “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” “We will continue to make our decisions meeting by meeting,” Mr. Powell said. “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.” The market was caught sleeping as most were waiting for NFP and BOJ on Friday for FX price action. Although I have been expecting an increasingly hawkish

Views are my own. Not investment advice. Just my thoughts on macro developments. I found myself getting very frustrated last week with the lack of follow through in USD despite the significant move higher in US rates. Although now the penny finally seems to have dropped that inflation isn’t going to revert quickly to 2% and the Fed will need to cause further pain if they want to bring inflation persistently down. So you can tear up your soft landing scenarios. Risk assets are being repriced lower as the risk free rate moves up. USD is finally joining the move, helped by the move lower in equities and some Value Date Month End USD demand on Friday. I feel that this USD move is only just getting started. The US data has been uniformly strong and there are still soft landing trades that will

Views are my own. Just my thoughts on macro markets. Not investment advice. USD is still lacking follow through. Given the string of strong US data, the sharp repricing higher of US rates and yesterdays 2% S&P500 sell off it still seems strange that USD hasn’t been able to rally further. There seems to be a lack of follow through. Given that all the catalysts to support my USD higher view have already happened I now feel cautious of sticking to the view without a clear driver to give it another leg. Either the USD is lagging the move in rates and has significant catching up to do. Or the bias for USD is lower and as soon as US rates stop supporting the move it will turn sharply lower. US rates now seem fairly priced with a 5.35% terminal rate and 5.15% for December 2023.

Broad macro views. Not investment advice. Views are my own. There’s plenty of debate about how strong the US NFP number really was given seasonal factors ect. Although either way US unemployment has still fallen to 3.4%. The labor market is extremely tight. Forward looking indicators for growth are also bouncing. ISM Services bounced to 55.2. This bounce in activity will reassert inflation pressures as shown in the ISM Prices Paid index coming in at 67.8. This is exactly what the Fed has been trying to avoid, the same mistakes made by predecessor Paul Volcker. Paul Volcker wrote a book called “Keeping At It” where he outlined the importance of keeping policy tight to bring inflation persistently down. Powell has referenced Volcker many times during his own battle against inflatio

Views are my own. Just my thoughts on macro developments. Not investment advice. After ignoring the higher than expected dot plot in the December SEP the market is now ignoring the hawkish minutes from that meeting (key paragraph below). The market seems to be more focused on the data and are coming to their own conclusion that inflation has peaked. NFP tomorrow and CPI on 12th Jan will be important for whether we get 25/50bps on 1st Feb FOMC, market currently pricing 35bps. Overall I still feel the market is underpricing the Fed as they will be forced to keep policy tight even as the economy falls into recession to prevent a re-emergence of inflation. Neel Kashkari warned of this in an essay he published yesterday: “Given the experience of the 1970s, the mistake the FOMC must avoid i